UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
November 22, 1978
IN THE MATTER OF STIRLING HOMEX CORPORATION, CONSOLIDATED DEBTOR; STATE OF NEW YORK, APPELLANT, FRANK G. RAICHLE, REORGANIZATION TRUSTEE, APPELLEE.
OAKES, GURFEIN, MESKILL, Circuit Judges.
A petition for rehearing and reargument having been filed herein by counsel for both appellant and appellee,
Upon consideration thereof, it is
Ordered that the opinion and judgment of the court be and it hereby is modified by addition of the following thereto.
The State of New York, appellant in In re Stirling Homex Corp., Nos. 78-5025, 78-5039, slip op. 371 (2d Cir. Nov. 22, 1978), has petitioned for rehearing and clarification of the judgment in respect to interest accruing to it and against it. Appellee-trustee has filed a cross-motion to reargue the appeal in respect to piercing the corporate veils of the debtor's subsidiaries. For the reasons that follow, we uphold in substance the appellant's claims to interest accruing to it but not as to interest accruing against it, and deny the appellee's claim. Specifically, we hold that interest should accrue to the State to July 13, 1972, the date of Stirling Homex's petition for reorganization, on the amounts of sales and use taxes owing by the debtor for the first and second tax periods; that the tax owing by the debtor for the second period is, however, $135,664.23, not $137,232.97; and that the trustee's interest on the tax refund due from the State should be based upon the difference between the amount actually withheld, $313,664.31, and the State's set-off. We otherwise adhere to our original opinion.
The State's claims
The State requests interest, on the amount of taxes ultimately determined to be owing for the first two tax periods, to the date of Stirling Homex's petition for reorganization, namely, July 13, 1972.Their request should be granted. The bankruptcy judge disallowed penalties and interest on these amounts in his May 3, 1977, decision (Appx. 296-97) only because the Bankruptcy Act does not permit the State to collect penalties on taxes owed by a debtor in reorganization. (The State originally computed a single figure for penalties and interest, without a breakdown.) But interest can be collected, and the State did make a claim for interest. Moreover, the Trustee does not dispute its collection. Our opinion should not be interpreted as disallowing such interest. In the headnote and at page 373 we state that we reverse so much of the district court's order as overturns the bankruptcy judge's findings as to the amount of the State claim. "Amount" should be read to include interest; we have left intact the bankruptcy judge's order that the State may make a claim for prepetition interest.
Interest should be computed, however, on $135,664.23, not $137,232.97, for the second period. The difference, claims the State, is the accrued interest between the time of assessment and the bankruptcy petition; but if that is so, the lower figure, which does not include interest, should be used to determine the principal amount, and pre-petition interest will be computed on that principal amount.
The State also asks that we limit the trustee's interest on the tax refund to the difference between $313,664.31 (the amount actually withheld, i.e., $316,958.02 minus $3,293.71) and the State's set-off of approximately $265,000.
Conceding that our disposition of this issue was unclear (see slip op. at 388, 390), we decline to reduce the amount of the interest in this manner. By the use of the difference formula, the State is effectively requesting interest from May 1973 on its claim for taxes, to be subtracted from the principal and interest admittedly due the trustee. But the State has had the use of this money from May 1973; accordingly, it should not receive interest on it. Perhaps the State means to argue that interest was awarded to the trustee only because of the State's wrongful withholding, and that the "wrong" extended only to the amount that should not have been set-off, hence the interest should be computed only on that amount. But the premise of this argument is false. The State conceded in its brief on appeal that the trustee is entitled to interest from the time he demands to recover a preferential treatment. Brief of Appellant at 41. Indeed, here the trustee made such a demand before May 1973 and the refund awarded that date appropriately included interest. Thus, the basis of the grant of interest was not the State's wrongful withholding.
Finally, the State contends that interest should be computed only on the amount actually withheld. This contention is reasonable; the State should not have to pay interest on the $3,293.71 which it actually paid to the trustee. Thus, the interest should be computed on $313,664.31.
We reject the trustee's claim because the first and second tax periods do not pose the same need for disregarding the corporate form. With respect to the bulk sale in the first tax period, the question is whether Cubet was "required to collect" a sales tax prior to the conceded bulk sale of its assets to Stirling Homex. We held that it was so required, notwithstanding the allegation that it was Brothers, whose assets Homex did not purchase, which was the selling arm of the operating group. This was an equitable result given Stirling's use of its corporate shells to conceal its activities from the public. Moreover, there was no evidence in the record that the sale of modules was doubly taxed; Stirling Homex cannot complain of unfairness on that ground.
With respect to the second and third tax periods, by contrast, the State seeks to tax Stirling for its sales to its subsidiaries, not for one of its de facto subsidiary's sales to a third party (which sales are deemed to be sales by Stirling because of the bulk transfer). Disregard of corporate entities would avoid any such tax. But the rationale for piercing the corporate veil is the inequity of permitting a corporation to avoid through the mere use of a subsidiary legal prohibitions that are meant to apply to its conduct. This rationale is inapplicable to the second tax period; it is not a case of the corporation's taking unfair advantage of its form. To be sure, the rationale's asymmetrical result may be argued to be "discriminatory." But this is in the nature of the "piercing" doctrine, an equitable doctrine whose only purpose is to prevent technical evasion of substantive rules. It is doubtful whether courts would ever "pierce the corporate veil" in any given context if the legal consequence were to unveil the corporation in every context.
As thus modified, the judgment hereinbefore entered is reaffirmed.
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